Tom and Jerry are the only members of society. The table above shows their margi

Question

Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites. If the marginal cost of a satellite is $54, the efficient quantity of satellites is

2.

3.

0.

1.

The table above gives the total benefit and total cost of producing missiles, a public good. What is the efficient number of missiles to be produced?

4 missiles

2 missiles

3 missiles

1 missile

Quantity
(satellites) Tom's marginal benefit
(dollars) Jerry's marginal benefit
(dollars) 1 50 40 2 40 32 3 30 24 4 20 16 5 10 8

Explanation / Answer

(a)

Efficient quantity is obtained by equating Marginal Cost to Social Marginal Benefit (Total marginal benefits of Tom and Jerry).

So, equilibrium quantity = 3, because at this level,

Marginal cost = $54 = Social Marginal Benefit = $(30 + 24)

(b)

The optimization rule for a private good is to equate marginal benefit with marginal cost. But for a public good, marginal cost is always zero, so that output is produced where marginal benefit is highest.

When quantity = 1, marginal benefit = 90 - 0 = 90 which is highest.

So, optimal output = 1 satellite.

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